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Note to Chris Anderson - lunch is never free

The Wired editor-in-chief's book, "The Long Tail: Why the Future of Business is Selling Less of More" , is often cited by those who believe that the internet is changing economic rules, despite the fact that most of the hard data has actually refuted many of his claims.

Now Anderson is back with another book to be released next year that is destined to become a hit with internet business types: "Free! Why $0.00 Is the Future of Business".

The basic premise is that technology is pushing the marginal cost of production to zero for many products and services and that:

"Every industry that becomes digital eventually becomes free."

I take point with quite a few of Anderson's arguments and think many of them are flawed.

Three items in his article stood out in particular:

1. While Anderson is correct in noting the incredible decrease in the price of bandwidth, storage and processing power over the years - a trend that is only likely to continue - he seems to think these costs are trivial. He also ignores the other costs of running a digital business (e.g. paying the salaries of the people who work for you).

Facebook serves as a perfect example of how "the trend lines that determine the cost of doing business online" do not "all point the same way: to zero".

While the company is able to provide its service for free to tens of millions of active users, it has significant costs in relationship to its revenues. In addition to the $200m in capital expenditure Facebook plams to spend this year on servers and infrastructure, it also aims to more than double its headcount from 450 employees to 1,000.

Clearly, the costs of running a wildly popular online service may be fairly small given the audience being served, but it's worth noting that Facebook's ability to scale to serve such an audience has thus far been predicated on the fact that it has raised hundreds of millions of dollars in outside financing. Without that financing, Facebook would not be able to do what it's doing since it just isn't making a whole lot of money.

2. Anderson's example of Yahoo offering "infinite" storage to users of its email service is completely asinine. Yahoo is not clearly not capable of fulfilling a promise to give every single internet user "infinite" email storage - nobody is capable of that. It is simply a marketing ploy based on common sense.

Just as the fractional reserve banking system is based on the assumption that all bank customers are not going to withdraw all of their funds at the same time, Yahoo's offer of unlimited storage for email is based on the assumption that the vast majority of its users are going to use relatively little storage.

And if Anderson had taken the time to read section 13 of Yahoo's Terms of Service ("General Practices Regarding Use and Storage"), he would have recognised that Yahoo has an out if its situation changed.

3. Anderson provides sample scenarios of "Free!" business models in his article. Some are quite ill-informed.Take, for instance:

"Scenario 1: Low-cost digital distribution will make the summer blockbuster free. Theaters will make their money from concessions — and by selling the premium moviegoing experience at a high price."

Unfortunately, as one of the article's commenters points out, Anderson does not seem to understand that this would not be supported by the motion picture business model.

The production costs of major Hollywood films are often financed in part by high-risk investors who get a piece of "equity" in the films but only get paid when a film makes enough money to trickle down to them through multiple levels of "shareholders" higher on the totem pole.

Ticket sales are the lifeblood for these investors and if Anderson believes they're going to be eager to invest when their risk is increased by a "free" business model that offers them no tangible benefit, I think he's been watching The Wizard of Oz far too much.

In all, Anderson provides six "broad categories" of methods that can be used to offer products and services that are touched by digital technology for free, from freemiums and cross-subsidies to advertising and labour exchange.

I find nothing revolutionary about any of these - they're not new.

The fact that some of them can be implemented more widely and extended further than they may have been before the advent of the internet certainly doesn't mean that "digital economics has turned traditional economics upside down."

The bottom line is that every business has to make money. Where that money comes from is almost irrelevant - somebody is paying the bills.

Milton Friedman was absolutely correct to repeatedly point out that "there's no such thing as a free lunch."

Anderson tries to convince readers that there's something remarkable occurring when two people eating a lunch that they're personally not paying for can't see who is footing the bill on their behalf. Obviously there isn't.

Unfortunately, in some of the more convoluted exchanges taking place that enable internet companies to offer products and services for free, long-term viability and stability is questionable.

Advertising-subsidised businesses, for instance, are highly vulnerable to economic downturns, as we learned in Bubble 1.0.

Perhaps the biggest problem with Anderson's new book will be the fact that it's so damn myopic.

The cost of a barrel of oil just hit a record high. Wheat prices have doubled in the past year and late last month hit an all-time high of $13.495 a bushel. Inflation is a real problem and may be worse than many think.

So while technologists like Chris Anderson like to talk about the "economics of abundance" and celebrate the fact that you now have "infinite" storage for your email, the truth is that where it counts (i.e. food, energy, shelter, etc.), the "economics of scarcity" still dominates.

It's all too convenient to ignore that when you think more about the virtual world than the real world.

Be that as it may, at the end of the day, books like "The Long Tail" and "Free!" amuse me. They play upon a natural human desire to believe that we live in times where established "rules" are being "broken" and new paradigms are being ushered in.

We do live in interesting times but to sell books, I would argue that authors like Anderson (and Malcom Gladwell) have mastered the art of spin and exaggeration.

They leverage current trends and fads to write "business" books that are heavy on sex-appeal and excitement but short on substance and perspective.

These books typically offer little more than a rehashing of the same sort of "New Economy" bullshit that was bandied about in the late 90s. And bullshit is always bullshit, no matter how it's (re)packaged and sold.

I personally hope that Anderson practices what he preaches and makes "Free!" free. After all, there would be something distinctly awkward about buying a book whose premise is that the future of business is free.

Somehow, however, I suspect that Anderson's publisher won't be turning the economics of book publishing upside down and that I'll have to go to these innovative public buildings where they loan books to poor consumers like Drama 2.0.

I'm so glad Google invented the public library. Google did invent the public library, right?

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Kaya PPC, Internet Marketing Manager at Optimised Media

Good post. Nothing is free. If it was no one would make any money.
In my opinion the cost of testing an online business idea has fallen dramatically. Someone with a good idea and the required skill could put their business in to action very quickly and at marginal costs (Facebook), as long as there is only a small user base. Costs are incurred when it comes to scaling businesses, but hopefully by that time investment has been secured.

Don't agree with all of the above (I do think there's value in much of the Long Tail basic idea, but happily concede that the book did little to expand the simple concept behind democratisation of content via means of production and means of distribution).

When he wrote The Long Tail, I think Chris was praising the changes that made it possible for people to make a living producing content that niche audiences want to consume - and make it easier for consumers to find content they really wanted rather than settling for mass media - a kind of realisation of the Punk/Indie ethic in the late '70s and early '80s in the music business. Those artists and labels weren't necessarily going to get rich like their musical forefathers, but they could make enough to sustain their musical vision and maybe give up their day jobs.

In some ways, the debate about democratisation of distribution is simply updating this ethic - but the creators (and distributors) of this content still deserve to get paid enough to keep going. Fame alone is not enough - or is it?

I wonder how Chris would feel about making his book available digitally, for free? After all, it'll cost him 'nothing' to do so...

over 10 years ago

Jim Hicks

Did you read the same Long Tail I read? Was their nothing of value in it? Why so much anger in your post? It does nothing for your credibilityand makes you seem jelious of their publishing success. You make some good points but so do Anderson and Gladwell. Their not perfect but neither are you. It's not the some old thing repackage because technology does change things, perhaps not to the degree these authors suggest but change is happening and smart marketers are trying to understand how that change is effecting consumer behavior. None of so blind as those who will not see. Have a nice day.

Yes Jim. I must be "jelious" of their publishing success. The fact of the matter is that many of the claims made in books like The Long Tail and The Tipping Point are not substantiated by hard data. While this doesn't mean that there's absolutely nothing of value to be found in the ideas these books present, it does throw into question the credibility of the authors as good authors still focus on research and accuracy.

You yourself admit that technology may not have changed things to "to the degree these authors suggest." If the premise of these books is that radical change is taking place and economic rules are being turned upside down when actual data doesn't back these arguments up, it's problematic no matter how you try to spin it. The authors know that but instead choose to make bold claims anyway because bold claims sell books. There's nothing wrong about pointing this out.

"Extraordinary claims require extraordinary evidence." - Carl Sagan

over 10 years ago

Alan Charlesworth, lecturer / researcher at University of Sunderland

I actually liked 'long tail' - but it was little more than a combination of niche marketing the 80/20 rule retailers have been aware of forever.

My take is that - and I doff my cap to him for it - Anderson is good at marketing his ideas and himself. His background in technical journalism [I think] betrays his lack of general knowledge and/or experience in business - hence my annoyance at him eulogizing the long tail as a new concept that he had discovered.

I think your points are well argued, but have you [we?] fallen into the trap of helping to promote a book that isn't even written yet? Again, full marks to Mr Anderson.

over 10 years ago

Tony Burt

Good post and you have really managed to encapsulate a lot of my feelings and frustrations regarding Chris Anderson and the Long Tail. His first book referred a lot to the music sector, and in particular the research he quotes from his pals at Rhapsody. I've been involved in the digital music space for a number of years and although I agree with the idea that digital enables new niche markets and makes it easier for consumers to find this content, he completely overlooks the real costs for licensing, encoding, storing, bandwidth and maintaining a sizable catalogue. Although distribution costs approach zero they will never be free, money is sill required to enable I'm afraid.

@Michael Weston, #2:
I did an interview with Chris at the beginning of this year and I asked him if he'd be giving the book away for free. His response:

"The digital forms we’ll make free in as many ways as possible. For example, the audio book, as an MP3 will be a free download for people who buy the physical book.

“We’ll try to make the ebook free. There’ll probably be a way to have a web-based advertising-supported version, much like a magazine. And we’re talking about possibly making one version of the physical book free and sponsored as well."

Having said that, the interview was back in January ... I don't know if he's actually delivered on the promise!

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